US investment giant BlackRock's proprietary research business has backed UK stocks to outperform, with foreign investors pulled in by 'relative political stability'.

The BlackRock Investment Institute this week moved to an 'overweight' position on London-listed stocks on the basis that a new government with a sizeable majority will encourage investors to recognise 'attractive valuations'.

But BII says a busy year for elections globally will not be a tide to raise all boats, with choppier waters predicted for stocks in the US and France.  

UK stocks have increasingly been viewed as cheap in recent years as they continue to underperform peers, with many international investors deterred by uncertainty about future policy direction in the wake of the Brexit referendum and several changes in the role of prime minister.

The MSCI UK index – which measures the performance of the large and mid cap segments of the UK market – is up 6.94, 5.74 and 2.7 per cent over three, five and 10 years, respectively.

The MSCI World, meanwhile, has added 7.38, 12.32 and 9.73 per cent, respectively, over the same periods.

And data shows the gap between the performance of UK smaller companies and international peers is even greater.

The MSCI UK Small Cap index is down 2.67 per cent over three years, while adding just 1.97 and 5.03 per cent over three and 10 years, respectively.

International small cap peers have added 2.15, 7.5 and 10.04 per cent, respectively, over three, five and 10 years.

But BlackRock II thinks the result of last week's general election could spell a change in fortunes for the perception of London-listed stocks.

It said: 'Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other [developed market] stock markets.'

BII had previously said UK markets could benefit from a Labour leadership willing to 'foster a more cooperative relationship with the EU, with closer partnership on defense given the Ukraine war'.

'And targeted trade agreements could benefit key sectors such as energy and chemicals,' it added.

'Improved EU relations could reduce market uncertainty, support foreign investment and aid the UK's growth prospects.​'

BII contrasted this to election years in the US, where 'neither candidate or major party... has made debt and deficits a key campaign issue, and in France.

Chairman Tom Donilon said: 'We think France's unprecedented political stalemate after its parliamentary election and weak fiscal outlook will draw greater investor scrutiny.

'Global elections add to the geopolitical volatility we see. This is a challenging time for incumbents.'

John Ions, chief executive of London-listed fund manager Liontrust, this week also said he expects greater political stability to benefit UK stocks, market aversion to which has hammered the country's UK asset management sector.

But Goldman Sachs Asset Management said on Wednesday that the new government is unlikely to be the key driver of stock movement for the forseeable future.

It said: 'Labour's manifesto policies imply relatively limited changes to fiscal policy.

'The new government is expected to set out further details of its policy agenda—including spending and taxation—in the weeks and months ahead.

'We expect investors to remain focused on disinflation progress and the potential for BoE rate cuts.'

Funds to back for UK rebound   

Managing director at FundCalibre Darius McDermott's top fund picks for a recovery in UK stocks:

'While we still have a long road ahead, business leaders and markets have largely accepted the new Labour government as a welcome change, providing a more stable political environment (particularly when compared to other parts of the developed world). 

'This renewed stability, combined with attractive valuations, reversing macroeconomic headwinds and easing interest rates, positions the UK for a potential rebound. 

'Investors looking to capitalise on this upswing may find value in UK-focused investment trusts.'

Schroder British Opportunities Trust (SBO)

After a long period in the eye of the storm, small caps have started to see a bit of a recovery and - coupled with increased M&A activity and attractive valuations - could be an incredibly attractive opportunity from here. 

SBO offers exposure to resilient small and mid-cap companies in the UK, with a focus on undervalued businesses with growth potential. 

Schroders' research expertise allows them to identify the very best opportunities across both public and private markets, making it a truly unique proposition.

Fidelity Special Values (FSV)

Another interesting option is FSV, a trust managed by Alex Wright, who has a proven track record of identifying undervalued mid and large cap UK companies. 

While the trust doesn't prioritise income generation, it has seen its dividend increase steadily since Wright took charge in 2012. 

This trust caters to investors seeking a value play in the UK market with a medium to long-term investment horizon.